When faced when uncertainty, the logical thing to do is to find more information about the situation. The trick is knowing how, and when to use this data effectively.
Playing with Numbers
Every piece of information we produce reduces uncertainty a little bit.
But you have to expend resources like time, effort, and money to gather information and process it into a usable form. Some types of information are cheap to produce, and other types are expensive.
This is a transcript from the video series The Economics of Uncertainty. Watch it now, on The Great Courses Plus.
How is information produced?
One of the main ways to create information is by measuring things. People measure anything and everything. In other words, people seem to naturally want to gather data and keep records of the things measured.
Humans love to compare numbers. Facts and figures fascinate us; the media bombards us with factoids, and we eat them up. We love to make charts and graphs out of the data we gather. Our natural fascination with data helps us to deal with risk. When we compare data, we notice patterns that can help us make inferences about things we don’t know, things we can’t ever know directly. Data aids us to make better guesses about what is most likely to happen in the future by using patterns we notice in the data.
Learn more about the nature of uncertainty
It’s not an intellectual leap to go from noticing patterns in data to creating models to help us make educated guesses. We do this in our everyday lives.
For example, say you live in a big Midwestern city and you make sure to fill your pickup truck with gas on Monday or Tuesday. You’ve noticed in your city that gasoline prices often jump up by large amounts on Wednesdays, and only gradually come back down over the weekend. Gas prices don’t always behave this way, but this strategy can help you deal with the uncertainty caused by not knowing exactly when gas prices will rise or by how much.
This tendency to gather and organize data into patterns that assist us is nothing new.
It’s surprising sometimes to think about how advanced the science of astronomy was in many ancient civilizations. In Egypt, astronomy was used to predict when the Nile River would flood. This was the make-or-break economic event each year in their civilization, similar to the arrival of the monsoon in India.
Gathering accurate information about the movement of the stars and planets helped reduce uncertainty about when to plant the crops because ancient peoples noticed patterns in the changing seasons.
Learn more about turning uncertainty into risk
Gathering data to make predictions from patterns is not the only benefit to information, however. There can be big payoffs to reducing uncertainty by producing information as well.
We can make better choices when we have more information. This, in turn, increases production and profits, reduces loss and waste, and generally improves people’s lives. Enormous industries have devoted huge amounts of resources to producing information.
The government invests billions of dollars a year into collecting data. Consider the Census Bureau, which keeps track of how many people live in the United States.
The private sector also gathers vast amounts of data. Before the advent of the Internet, gathering data was essential to running a modern business. Even today, companies routinely perform test marketing, consult with focus groups, and conduct surveys before they commit to new products. Many companies thrive on the business of collecting and selling data.
Regardless of the type of information gathered or assessed, data gives us the ability to make predictive choices each day. Using this data as a tool, we can allocate resources to make decisions and better our lives about what is most likely to happen.
Learn more about decision science tools
Common Questions About Reducing Uncertainty
In order to reduce uncertainty, businesses should adhere to a plan and a vision, create a system, and motivate their staff.
When faced with uncertainty, we should modify our decision-making process by researching all our options, forming a clear picture of where the uncertainly lies, and maintaining a clear vision of goals and values.
To reduce uncertainly in a given situation, you need to gather as much relevant data as possible.
Data analytics is important for businesses because it enables them to make decisions about how they are performing, how their customers are using their products, and how they can better serve their customers in the future.